The Cheapest Small Business Loans and Financing Options

Starting or growing a small business often requires access to financing. While traditional bank loans used to be the go-to option, there are now many alternative lending sources that provide affordable capital to business owners. This article will explore the cheapest small business loan and financing options available in 2023.

SBA Loans

One of the best sources of low-cost small business financing is the Small Business Administration (SBA). The SBA guarantees portions of loans made by approved lenders, which allows the lenders to offer lower interest rates and better terms. Here are some of the cheapest SBA loan options:

• SBA 7(a) Loans: The SBA’s primary and most flexible loan program, 7(a) loans can provide up to $5 million for working capital, equipment, real estate, and more. Interest rates range from 6-10% and terms reach 25 years.
• SBA 504 Loans: 504 loans provide up to $5 million for major fixed assets like real estate and equipment. Rates are below 7% and terms reach 25 years. The SBA guarantees 40% of the loan.
• SBA Microloans: Loans up to $50,000 from non-profit lenders, with interest rates from 8-13%. Terms up to 7 years. Helpful for startups and underserved entrepreneurs.

SBA loans do have stringent eligibility requirements regarding time in business, collateral, and credit scores. But they offer excellent rates and long repayment periods.

Online Lenders

Online lending platforms like LendingClub and Funding Circle provide small business loans with quick approvals and funding. While rates are higher than SBA loans, they are still competitive:

• Loans up to $500,000
• Fixed rates from 7-29%
• Terms up to 5 years
• Minimal paperwork
• Funding in as little as 1 week

The easy online process makes these loans convenient for tech-savvy entrepreneurs. Just be sure to compare rates across multiple lenders.

Non-Profit Organizations

Non-profit lenders like Accion and Opportunity Fund offer microloans to underserved small businesses that may not qualify with traditional banks. These programs provide:

• Loans up to $100,000
• Fixed rates as low as 8%
• Flexible collateral and credit requirements
• Technical assistance and business mentoring

The application process is hands-on, but worth it for affordable capital. Grants may also be available.

401(k) Business Financing

Entrepreneurs can use their 401(k) or IRA retirement accounts to invest in their own business through ROLLOVER Business Startups. While controversial, this avoids paying interest and gives you access to your own funds. Be sure to consult your accountant to avoid penalties and taxes.

Peer-to-Peer Lending

Peer-to-peer lending sites like LendingClub connect investors looking to fund small businesses with entrepreneurs needing loans. This disintermediation can provide better rates:

• Loans up to $500,000
• Rates from 7-35%
• Terms up to 5 years

Lending criteria is still strict, but worth exploring. Be sure to have an excellent business plan.

Equipment Financing

Financing equipment through leasing or loans can be much cheaper than paying cash, while allowing you to get the equipment you need upfront. Options include:

• Equipment leases – skip down payments and pay only for the equipment’s useful life
• SBA 504 loans – get long repayment terms for major equipment
• Merchant cash advances – borrow against future sales

Shop around and compare financing terms rather than paying large sums from your working capital.

Invoice Factoring

With invoice factoring, a lender advances you cash against your outstanding customer invoices. This provides funds faster than waiting for invoice payments:

• Up to 90% of invoice value advanced
• Rates from 1-5% of invoice amount
• Quick access to working capital

Just be sure to factor hidden costs into your overall rate.

Bottom Line

The cheapest small business loan or financing option will depend on your specific needs, qualifications, and financial situation. Be sure to compare multiple lenders and financing vehicles to find the best rates and terms. The SBA provides the most affordable option for those who qualify. Online lenders provide easy access. And alternative options like microloans and equipment financing can prove cheaper than conventional loans. Do your research to find the optimal capital source for your small business.